Video: What Is a Financial Plan for a Business? - Definition & Example

A financial plan for a business can help managers determine if they can achieve the organization's goals. The financial plan is one of the first things created to help managers make decisions that are in the best interest of the organization.2016-03-01

Paul has been in higher education for 17 years. He has a master's degree and is earning his PhD in Community College Leadership.

A financial plan for a business can help managers determine if they can achieve the organization's goals. The financial plan is one of the first things created to help managers make decisions that are in the best interest of the organization.

What Is Financial Planning

Financial planning for a business is the task of determining how the organization will afford to achieve its strategic goals. Usually, an organization creates a financial plan immediately after the vision and objectives have been determined. The financial plan describes each of the activities, resources, equipment, and materials that are needed to achieve an organization's objectives as well as the timeframe.

Benefits of a Developing a Financial Plan

Developing a financial plan is critical to the success of any organization. It validates the business plan, by confirming that the objectives set are achievable from a financial point of view. It also helps the CEO to set financial targets for the organization and reward staff for meeting objectives within the budget. The following diagram shows how the financial plan fits into the overall business plan of an organization.

Example

A financial plan can be divided into several parts. Below is an outlined example of a financial plan that can be used by an existing organization:

Financial Worksheets: The first part of a financial plan is the worksheets. These statements tell the story of the organization's expenses, cost of production, sales forecasts, advertising budgets, and growth expenses. When developing a financial plan for a business, you need to know the current financial situation of the organization. The following worksheets tell the current condition of the organization.

Cash Flow Projections: The next step in a financial plan is to forecast the organization's cash flow. In this section, you are trying to estimate future cash that the organization will receive from the sale of goods or services. It is a good to have a two and three year projected cash flow estimation. The plan will also need to include a break-even analysis. This analysis will determine at what point the organization will cover all its expenses from the sale of goods or services.

Financial Statements: This part of the plan determines whether a business idea is still viable. This step consists of the income statement, the balance sheet, statement of owner's equity, and finally, a brief explanation/analysis of these statements. The income statement details the revenues and expenses during a particular period of time. The balance sheet details all the assets and liabilities over a period of time. The statement of owner's equity details the changes to the owner's equity account during a period as the organization issues dividend payments and retains money for use within the organization for investment.

Financial Assessment: The final step in developing a financial plan is the assessment. You take all the information outlined above and determine how much money will need to be borrowed or invested in the organization to cover growth expenses, asset purchases, and to operate the business over a given period of time.

Lesson Summary:

A business creates a financial plan immediately after the vision and objectives have been set. The financial plan describes each of the activities, resources, equipment, and materials that are needed to achieve these objectives as well as the timeframes involved. The financial plan is made up of financial worksheets, cash flow projections, financial statements, and finally an assessment.

Summary:

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